This article will focus on the disadvantages of liquidation in relation to the CVL model.

What are the disadvantages of liquidation?

1. Some payments may still remain

Liquidation is generally a cost-effective option that will prevent you from having to make further payments.

However, there are some instances where you will still be held liable for settling outstanding amounts:

Personal guarantees

If you've given personal guarantees to creditors regarding company debt repayments, you (or your guarantor) will be held legally liable for settling these amounts.

Director's loans

Alternatively, if you've borrowed money from the company in the form of dividend payments, you'll need to pay this back.

This is known as an 'outstanding loan account'. It's most likely to occur when directors have drawn dividends while the business wasn't profitable.

2. Valuable assets will be lost

Though you are likely to be shielded from most costs via liquidation, assets linked to the company will be used to settle your debts.

Company assets

Your company assets will be sold to settle your debts (unless you have a 'Pre pack' agreement in place). Pre pack means your assets will still be sold, but can be bought by a 'newco'.

Company assets often have more value in combination, when they facilitate an entire process or procedure. When separated, these are likely to offer less value, both in terms of re-use and re-sale.

This means the returns are likely to be much lower than your initial expenditure. And, it means you will not be able to use these assets again for future ventures.

Staff

With redundancy, your employees – and their shared expertise – will be split up. This will make it harder to re-establish these skill sets elsewhere. However, you can avoid this by selling part of the business as a going concern.

Tax losses

Any tax losses in the company cannot be used against another company.

3. Director's conduct investigations

The Insolvency Practitioner will report any proven instances of misconduct to the Insolvency Service. The insolvency practitioner has a duty to investigate the conduct if they think there has been an instance of malfeasance or fraud on the part of the directors.

This could lead to director disqualification, liability for company debt or even a custodial sentence in extreme circumstances.

With all of these considerations to bear in mind, you should not enter into liquidation lightly. However it should be remembered that liquidation is really the only option for the company if there is no money left to pay creditors. If the company or directors cannot afford to pay an insolvency practitioner to liquidate the company via a creditors voluntary liquidation then there are two options depending on the size of the debt. If the debts are small then it may be possible to dissolve the company. If not, then it is likely that the creditors will seek to wind the company up. i.e a compulsory liquidation.

The disadvantages of this type of liquidation are as follows;

It can take a long time 6-12 months which means that ex employees will not be able to claim redundancy until the process has finished

The official receiver has a mandatory duty to investigate the directors conduct, whether or not they have suspicions malfeasance.

You will need to go to court.

It doesn’t look good on your company/personal credit record if someone does an extended credit check. This is most likely if you are involved in heavily regulated industries or national security

Just a quick note to say a big thank you to all the staff at KSA, our CVA was passed today by creditors voting in an overwhelming number including HMRC to accept the proposal as prepared by KSA.

The road to reach today’s conclusion has been bumpy, but at each stage your team has supported and guided us through the issues and we have reached a very satisfactory outcome to the benefit of customers, staff, all creditors and shareholders.